Canadians prudent mortgage borrowers

The Canadian Association of Accredited Mortgage Professionals new research finds Canadians are being prudent and not taking undue risks when taking out mortgages.

Will Dunning, the chief economist for CAAMP, in a special report addressing concerns expressed by Finance Minister Michael Flaherty at the end of 2009 on home buyers taking on too much risk, said Canadians are “indeed assessing their abilities.”

The Bank of Canada has also expressed concern that an increasing number of Canadians could default on their obligations.

“When borrowing funds, especially for mortgages, households also need to assess their ability to service their debts over the entire maturity of the loan, taking into account both the likely changes in income and in interest rates, as well as the risks surrounding the outlook,” according to the bank.

One very important point Dunning made in his report entitled, Revisiting the Canadian Mortgage Market — Risk is Small and Contained January 2010, is the rapid growth of mortgage credit (expected to reach $1 trillion in 2010). Average mortgage amounts have gone up due to a marked rise in Canadians becoming homeowners, he added.

He estimated the share of Canadian households now in homeownership is 70 per cent. It was 63.6 per cent in 1996 and 68.4 per cent in 2006. The increase has resulted in growth in mortgages by almost two-million households. This alone, he said, has accounted for at least one-half of the growth of Canadian mortgage credit.

“This data certainly gives rise to the question of whether Canadians are taking on too much mortgage debt,” he said in his report. “But, the data already shown — that a large share of the growth in debt is due to an epochal shift from rental tenure to homeownership — is our first reason to reduce our concerns, so long as Canadians are being prudent.”

Excerpts from the CAAMP news release about the report’s findings are reprinted below:

New research using data collected by the Canadian Association of Accredited Mortgage Professionals (CAAMP) from its corporate members strongly suggests that Canadian mortgage lenders and borrowers, including first-time home buyers, are being extremely prudent with their borrowing and lending.

Last month, CAAMP surveyed members who issued more than 40,000 mortgage loans totalling $10 billion, which were funded during 2009 (the data is for home purchases only and excludes renewals or refinances of existing mortgages). The dataset represents about one-sixth of the total mortgage activity for home purchases in Canada.

The key findings in the report, Revisiting the Mortgage Market — Risk is Small and Contained, includes:

• Eighty-six per cent of these home buyers chose fixed-rate mortgages. This share fell late in the year as variable rates became more attractive (at 2.25 per cent compared to four per cent for fixed rates)

• Among borrowers who chose fixed rates, a significant number opted for longer terms — less than five per cent chose terms of two years or less, 20 per cent took three-year terms, five per cent four years, leaving 70 per cent with a fixed rate for five years or more.

• The vast majority of people who took out their first mortgage last year borrowed less than they could afford to, as their Gross Debt Service (GDS) ratios are far below allowed maximums, even at the higher interest rates that are used to qualify them for their mortgage.

• The high share of fixed-rate mortgages and low GDS ratios for home buyers are contrary to perceptions that consumers and financial institutions are taking on more risk.

“This new research shows that Canadians are assessing their abilities and vulnerabilities,” said Jim Murphy, president and CEO of CAAMP. “They are being prudent and the vast majority of Canadian mortgage borrowers are not taking on undue risks. They have factored rising interest rates into their mortgage decisions.”

Will Dunning, CAAMP Chief Economist and author of this new report, said that a small minority of home buyers are cutting it close when it comes to affordability.

He stressed that “this dataset is primarily focused on first-time home buyers who are considered to be most at risk. Each year, about 2.5 to three per cent of Canadian households make a first-time home purchase. Our data shows that only a small percentage of them are pushing the envelope — about 4,000 households — which amounts to a tiny fraction of the 13.25-million homeowners in Canada. For those who borrowed in prior years, risks are even lower.

“The bottom line from the simulations is that even though mortgage payments will probably rise for most borrowers, the increase in their incomes will more than offset the higher payments. All in all, the degree of risk from rising mortgage rates appears to be small and manageable.”

Daryl Harris, a mortgage broker with VERICO One Link Mortgage & Financial in Winnipeg, who serves on the national board of CAAMP, said Dunning’s analysis is in line with what he is experiencing with his local mortgage business.